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Click here for Part 1.

Dogs of the S&P 500 - yes, you read the headline correctly, and, no, I did not mistakenly insert "S&P 500" in place of "Dow". This is our second annual Dogs of the S&P 500 series. Most of us are at least acquainted with the classic Wall Street strategy known as "Dogs of the Dow" which was first popularized some twenty years ago. The strategy calls for buying shares of the ten highest yielding companies in the thirty stock Dow Jones Industrial Average. A major part of the attraction of the rules based strategy is its simplicity but inherent in the strategy of attempting to discover high dividend yielding value stocks that have fallen out of favor are elements of reversion to the mean and dollar cost averaging.

One major shortcoming of the "Dogs of the Dow" is, with only thirty stocks in its universe, it becomes unlikely to produce a diversified portfolio. After giving the matter some thought we decided it seemed intuitive that the strategy could be improved by applying the same theory to the larger and more representative S&P 500 Index. With dividend paying stocks garnering additional interest from all types of investors we think this could be a particularly good strategy for 2013. To that end we have computed the highest yielding stocks in the S&P 500 as of December 31, 2012 and are profiling the 15 highest yielding companies in this three part article. Here are the second five companies:

Exelon Corp. (EXC)

The stock closed at $29.74 giving the company a market cap of $25.41 billion. Exelon is a utility services holding company that engages in the energy generation and distribution business. The annual dividend is $2.10 and the last quarterly dividend of $0.525 was paid December 9, 2012. The dividend is well covered by the $2.85 the company was estimated to earn in the year just ended as well as by the nature of its business. The year-end yield was 7.06%.

Cliffs Natural Resources (CLF)

The stock closed at $38.57 giving the company a market cap of $5.50 billion. Cliffs Natural is a mining and natural resources company engaging primarily in the production of iron ore and met coal. The $2.50 annual dividend is covered by estimated earnings per share of $3.59 in the year just ended but earnings are highly dependent upon volatile iron ore prices. The last quarterly dividend of $0.625 was paid December 2, 2012. The year-end yield was 6.48%.

Reynolds American Inc. (RAI)

The stock closed at $41.43 giving the stock a market cap of $23.16 billion. Reynolds's manufactures and sells cigarettes and other tobacco products in the United States. The annual dividend is $2.36 and the current quarterly dividend will be paid January 2, 2013. The dividend is well covered by earnings that are estimated to be $3.12 next year and by the stable nature of the business. Note that the dividend was increased $0.12 per share last year. The year-end yield was 5.70%.

Altria Group Inc. (MO)

The stock closed at $31.44 giving the company a market cap of $63.63 billion. Altria (the old Phillip Morris) manufactures and markets cigarettes, smokeless products and wine. The annual dividend is currently $1.76 per share and has been increased 46 times in the last 43 years (including last year). The next quarterly pay date is January 13, 2013. The dividend is well covered by both the $2.38 per share that the company is estimated to earn next year as well as the stable nature of the company's business. The year-end yield was 5.60%.

Pepco Holdings Inc. (POM)

The stock closed at $19.61 giving the company a market cap of $4.50 billion. Pepco is a utility company that engages in the transmission, distribution and supply of electricity and natural gas. The annual dividend is $1.08 per share and the last quarterly dividend of $0.27 was paid December 30, 2012. Earnings per share are expected to increase from an estimated $1.20 in the year just ended to $1.26 this year. The year-end yield was 5.50%.

Click here for Part 3.

Source: 2012 Dogs Of The S&P 500 To Buy Now - Part 2